What is the law in chinese tax administration

The Law on Legislation2 LL sets out a system of legal norms that only recognises state Council regulations and ministerial regulations as having the force of law, insofar as documents is

Wei Cui*

What is the ‘Law’ in Chinese Tax

Administration?

Abstract

In December 2009, within just weeks of the issuance of several controversial (and arguably ultra vires) tax circulars by the Ministry of Finance (MOF) and by the State Administration of Taxation (SAT), the SAT promulgated

a seminal regulation governing informal rulemaking activities of all tax authorities in China This regulation took effect on 1 July 2010 and promises

to significantly improve the clarity, transparency, predictability and quality of rulemaking on taxation in the PRC Ironically, it can also be seen as a rebuke

to a cynical view that is rather prevalent among Chinese tax practitioners and reinforced by the recent problematic tax circulars: namely, that because the PRC government does not care about creating order in tax administration and taxpayers are unwilling or are unable to enforce their rights, informal rules issued by the government should be given full weight even if they contradict laws created by higher authority and/or are inconsistent with each other The new SAT regulation on informal rulemaking is just one illustration of the dynamic development of the rule of law in taxation in China This article uses the enactment of the new regulation as an occasion for examining the question: what is the ‘law’ in Chinese tax administration?

* Center for Comparative Fiscal research, China University of Political science and Law

Paradoxically, the discourse in China about the rule of law in taxation is going through both a primitive and a dynamic phase The discourse is primitive in obvious ways the meaning and scope of ‘law’ are not yet clear, and there is wide divergence between what the written rules say about this matter and actual practices many taxpayers and tax professionals do not distinguish between official prescriptions that have the force of law and those that do not, and they harbour a high tolerance for inconsistencies among informal rules which have a purported legal effect Litigation against tax agencies is still relatively rare on the other hand, within just the last few years, the rule of law in tax administration has also witnessed significant progress the sat has made surprising advances making procedural improvements in rulemaking, audit procedures, administrative appeals and other areas, heeding the state Council’s directives on ‘administration in accordance with the rule of law’.1 Prominent public criticisms of the lack of rule of law in taxation are heard with greater frequency Finally, China’s attempt to curb real or alleged international tax avoidance is rapidly drawing international attention and fuelling rule of law concerns

This article aims to lay a foundation for analyses of the rule of law in Chinese taxation, by tackling the question, what is ‘law’ in China’s tax system? the answer given may be summarised as follows The Law on Legislation2 (LL) sets out a system of legal norms that only recognises state Council regulations and ministerial regulations as having the force of law, insofar as documents issued

by central executive branch entities are concerned.3 The judiciary has explicitly endorsed this view however, this view has been largely divorced from actual practice, and in the realm of tax administration, only a miniscule portion of the moF and sat’s tax rulemaking has taken forms that would be recognised as law

by the LL The remaining and vast majority of moF and sat rules have, until recently, been barely distinguishable from government internal documents even where tax authorities attempt to impose self-constraints on agency rulemaking, they adopt a much more expansive view of the scope of the law than do the LL and courts There are thus at least three sharply diverging positions about what constitutes the law in tax administration:

1 see Guofa [2004] no 10, Key Points in implementing the Comprehensive Promotion of

administration in accordance with the rule of Law (state Council, 22 march 2004).

2 Law on Legislation (national People’s Congress (nPC), adopted 15 march 2000, effective 1 July 2000).

3 statutes adopted by local legislatures and regulations issued by local heads of the executive branch also have the force of law within the relevant local jurisdictions: see

Pt ii.a below

1 the position of the LL and the judiciary;

2 the approach of the moF/sat in practice and acquiesced to by many tax professionals; and

3 the sat’s ‘reformist’ view newly announced in 2010

This divergence is partly hidden by the paucity of civil tax litigation, which also means that there has been little external constraint on tax rulemaking, despite the tax authorities’ theoretical vulnerability in terms of the legal effectiveness of their pronouncements

Part ii of this article describes the system of legal norms laid out in the LL and related regulations, as well as the judicial understanding of that system for purposes of formal adjudication Part iii shows how the view of the scope

of law described in Part ii has had little bearing on rulemaking in Chinese taxation, and how tax administration has operated, in an important sense, almost entirely outside the scope of law Part iV summarises the sat’s own view of the scope of tax law as expressed in a very recent regulation governing rulemaking procedures by tax agencies This view differs significantly from that

of the LL, but is nonetheless a principled view, and represents an important shift in tax administration The conclusion analyses possible directions for future development

II The System of Formal Legal Rules

A The Law on Legislation and Related Regulations

the LL is a foundational statute in the Chinese legal framework,4 and is important both for its explicit provisions and as a reference point for the executive and judicial branches’ understanding of the law on its face, the statute applies to the enactment, revision and nullification of national statutes (by the national legislature), ‘administrative regulations’ (by the state Council),5

local statutes (by sub-national legislatures) and certain regulations issued by ethnic autonomous regions.6 it also governs, in the same manner, regulations

4 albert Chen, An Introduction to the Legal System of the People’s Republic of China (3rd ed,

Lexisnexis, China, 2006), ch 6.

5 ‘administrative regulations’ and ‘state Council regulations’ will be used interchangeably

in the remainder of this article.

6 LL, art 2.

issued by ministries under the state Council and certain local governments, but leaves most procedural rules regarding these two types of regulations to be formulated by the state Council.7 While the statute does not state anywhere that no other type of documents issued by government entities have the force of law and that the rules governed by it are the exclusive sources of law, it strongly implies so This is because the central purpose of the LL is to bring consistency and uniformity to the Chinese legal system,8 and its ability to do so would be severely limited if rules with the force of law are not governed and ordered by it The importance of the LL in delineating the formal sources of law can be better appreciated in light of the statute’s legislative history The LL represented

a major compromise between the Chinese legislative and executive branches.9

a view of the nPC as the supreme source of law is embodied in China’s constitution.10 despite this constitutional framework, the nPC made sweeping (and vague) delegations of authority during the 1980s to the executive branch and the judiciary, either to interpret or to make law Beginning with the passing

of the administrative Litigation Law (aLL) in 1989,11 however, the nPC began to gradually reclaim its legislative authority, and to impose limits on the executive branch’s ability to make law according to the aLL, in handling administrative cases, courts must take national and local statutes, as well as state Council regulations as the basis for making decisions.12 By contrast, ministerial and local governmental regulations are to be taken only ‘as references’

7 Ibid; see, state Council decree no 321, ordinance regarding Procedures for the

Formulation of administrative regulations (issued 16 november 2001, effective 1 January 2002) (‘administrative regulation-making Procedures’); state Council decree

no 322, ordinance regarding Procedures for the Formulation of regulations (issued 16 november 2001, effective 1 January 2002) (‘regulation-making Procedures’)

8 see, for example, Gu anran, explanatory remarks regarding the draft Law on

Legislation, delivered at the nPC meeting on 9 march 2000; Guofa [2000] no 11, state

Council notice regarding implementing the Law on Legislation (issued 8 June 2000) (referring to state Council regulations and ministerial and local government regulations, but not to other normative documents, as ‘constituent parts of the nation’s unified legal system’)

9 see, for example, xu anbiao, The allocation of Legislative rights under the Law on Legislation; available at: http://www.chinalawedu.com/news/16900/171/2004/10/ ma0223793413101400215043_135733.htm

10 Constitution of the People republic of China, arts 58, 62, and 67

11 administrative Litigation Law (nPC, adopted 4 april 1989, effective 1 october 1990) The aLL governs judicial proceedings against government agencies.

12 aLL, art 52

by courts.13 subsequently, during the drafting of the LL, the nPC considered reserving the power of statutory interpretation to the legislative branch.14 This attempt did not prevail and extensive delegations of legislative authority to the state Council were codified.15 moreover, ministerial and local governmental regulations are recognised as part of the formal legal order.16 nonetheless, despite the political dominance of the executive branch, among documents issued by central government ministries, the LL only included state Council and ministerial regulations as part of the formal legal order in recognition of this special status accorded to ministerial regulations by the LL, central ministries including the moF and sat have consistently observed the distinction between regulations and documents of lesser authority,17 although regulations represent a miniscule portion of these agencies’ published rules

the LL, along with several subsequent administrative regulations, also articulated certain features common to all rules having the force of law

First, all rules governed by the LL cannot have a retroactive effect, with the exception of rules ‘formulated specially for the purpose of better protecting the rights and interests of citizens, legal persons and other organisations’.18

This principle is affirmed in state Council ordinances regarding administrative regulations and ministerial regulations,19 and is also explicitly invoked in the sat’s own regulation regarding regulation-making procedures.20 By contrast, as discussed in Part ii below, at least until 2010, many circulars issued by the moF and the sat, whether they set out new rules or interpret existing ones, were applied retroactively

13 Ibid, art 53

14 see Zhang Chunsheng, explanatory remarks regarding the draft Law on Legislation, delivered at the 12th meeting of the nPC standing Committee on 25 october 1999 (describing a draft of the LL which would have withdrawn earlier delegations of power

to interpret law).

15 LL, arts 8-11.

16 For further discussion, see Chen (note 4 above), ch 6.

17 see Caibanfa [2002] no 68, opinions of the ministry of Finance on the implementation

of the Law in Legislation (moF General office, issued 4 december 2000) (laying out conditions for making moF regulations); sat decree no 1, implementation measures for regulation-making by tax agencies (adopted 1 February 2002, effective 1 march 2002).

18 LL, art 84.

19 administrative regulation-making Procedures, art 29; regulation-making Procedures,

art 32 see also Guo Fahan [2002] no 134, notice regarding strict implementation of

article 32 of the ordinance regarding Procedures for the Formulation of regulations (state Council Legislative affairs office, issued 14 may 2002).

20 see implementation measures for regulation-making by tax agencies (note 17 above), art 3.

second, the solicitation for public input is a requirement for formal legal rules, especially those made by the executive branch There is no clear criterion for what constitutes sufficient solicitation, let alone a sufficient response to input received The failure to engage in such solicitation is, in any case, not considered actionable under the aLL.21 nonetheless, the recommendation for solicitation

of public input is consistently applied to all administrative and ministerial regulations,22 while it is not regarded as relevant for rulings and announcements with lesser authority moreover, as of 2010, the state Council does require the publication of all draft state Council and ministerial regulations unless there is a legal requirement that they be kept confidential.23

third, formal rules of law are characterised by extensive procedures for their adoption While the LL itself lays out such procedures for national and local statutes, the state Council has stipulated procedures for the adoption of regulations.24 two features of such procedures are perhaps most telling the first is that for regulations even to be proposed internally, the rules they contain must already be ‘mature’.25 there is no mechanism for issuing temporary or trial regulations, and, in practice, trial measures tend to be issued in formats with lesser authority than regulations.26 the second is that regulations must

be reviewed and approved by the highest relevant body within the

regulation-21 see Fa [1991] no 19(Provisional) opinions regarding Certain issues in the

implementation of the administrative Litigation Law (supreme People’s Court, issued

11 June 1991), s 1(1) (‘specific administrative actions’ that are actionable must be directed at specific persons)

22 administrative regulation-making Procedures, arts 12, 19-22; regulation-making Procedures, arts 14, 15, 20-23.

23 Guobanfa [2010] no 3, notice regarding the Printing of the state Council’s Legislation

Work Plan for 2010 (state Council General office, issued 1 January 2010).

24 see, generally, administrative regulation-making Procedures and regulation-making Procedures.

25 see administrative regulation-making Procedures art 8; regulation-making Procedures, art 19.

26 Compare, for example, Guoshuifa [2005] no 201, administrative measures for

Formulating normative documents in taxation (for trial implementation) (sat, effective 1 march 2006, repealed 1 July 2010) (‘trial measures for normative documents’, adopting the format of an informal rule), and the administrative measures for Formulating normative documents in taxation decree no 20 (sat, effective 1 July 2010) (‘new measures for normative documents’, a formal regulation), both of which are discussed in Pt iV below.

making agency, and signed by the head of the agency.27 Just as the requirement for public comment solicitation may deter the issuance of formal regulations in other countries, in China it is this internal political process that prevents many regulations from being proposed in the first place

Finally, all rules with the force of law may be challenged as being inconsistent with rules of higher authority through non-judicial procedures Citizens may apply for review by the nPC standing Committee of potentially invalid administrative regulations,28 and by the state Council of potentially invalid ministerial regulations.29 although these rights have been rarely exercised, they are nonetheless conceptually important This is because the Chinese judiciary is generally regarded as having no power to invalidate statutes and regulations.30

Because these rules are generally legally binding, their validity must therefore be challengeable through other channels Conversely, if certain rules issued by the government are not considered legally binding, there is arguably less need for non-judicial procedures for invalidating them Courts may simply disregard such rules if they are inconsistent with higher law

these four features of formal legal rules demonstrate that the conception

of what rules have legal effect in the Chinese legal system is not arbitrary.31

rather, it reflects a fundamental view about what characteristics rules deserving

to be called the law must display: legal rules can be made (and repealed) only

by the entities and persons with the authority to do so; they cannot be applied retroactively to the detriment of the persons subject to them and they should ideally be made pursuant to some process of public participation

B Judicial Views of Rules with Formal Effect of Law

as discussed above, the aLL was an important precursor of the LL in curbing the executive branch’s ability to make law the aLL does not of itself state that any effect should be given to government pronouncements of lesser status

27 in the case of state Council regulations, this means the standing Committee of the state Council and the Premier, respectively; administrative regulation-making Procedures, arts 26 and 27 For ministerial regulations, this means a ministerial committee and the minister, respectively; regulation-making Procedures, arts 27 and 29.

28 LL, art 90

29 regulation-making Procedures, art 35.

30 Lawmaking power is, in theory, reserved to the legislative branch and executive branch entities to which such power has been delegated see Jie Cheng, ‘Constitutional

reflections on Judicial interrogatories’ (2007) 4 Faxuejia 122 at 129

31 The publication of rules intended to have the effect of law is another notable feature common to all such rules.

than regulations in a seminal document summarising discussions at a national judicial conference held in shanghai in 2003 (‘shanghai meeting minutes’),32

the supreme People’s Court (sPC) distinguished formal regulations from

‘interpretations for specific application’ as well as ‘other normative documents’, all of which may be issued by government agencies to implement law or policy although ‘agencies frequently rely on such interpretations … and other normative documents as the basis for specific administrative actions’, the sPC states they are not ‘formal sources of law, and do not have the binding force

of legal norms’.33 nonetheless, if a court, when adjudicating a case relating

to specific administrative actions, determines that such interpretation or normative document possesses ‘legal validity, effectiveness, reasonableness and appropriateness’, it may give effect to such interpretation or document in determining whether the specific administrative act has a legal basis.34

the message of the shanghai meeting minutes seems clear: government pronouncements with lesser authority than regulations are not legally binding, and will be given effect only at a court’s discretion This message is also entirely consistent with the LL’s view of what has the force of law however, as we will see in connection with moF and sat rulemaking practice, the impact of the shanghai meeting minutes on the behaviour of executive branch agencies has been limited This is partly attributable to the fact that, according to the aLL,

no suits may be brought to court against government agencies merely for the adoption of ‘administrative regulations, regulations, or decisions and orders with general binding force’.35 The sPC has interpreted such decisions and orders

as encompassing ‘all normative documents issued by administrative agencies repeatedly and generally applicable to more than specific parties’.36 While the rule may be justifiable in connection with the adoption of formal legal rules on the ground that courts would have no power to provide a remedy (since they cannot invalidate any rules with formal legal effect), its rationale is less clear in relation to other government announcements

32 Fa [2004] no 96, meeting minutes regarding the application of Legal norms in

reviewing administrative Cases (sPC, issued 18 may 2004), s 1, para 3

33 Ibid, s 1.

34 Ibid.

35 aLL, art 12.

36 Fashi [2000] no 8, interpretations of Certain issues in the implementation of the

administrative Litigation Law (sPC, published 8 march 2000 and effective 10 march 2000), art 3 This has been widely understood as part of the aLL’s position that only specific administrative acts, and not ‘abstract administrative actions’, such as the issuing

of regulations, can be causes of action under the aLL see aLL, art 2 (a lawsuit may be brought against any specific administrative action by administrative agencies or personnel that infringes a person’s lawful rights and interests).

III Lawlessness in Tax Rulemaking

Unfortunately, the seemingly clear formal legal framework just described produces only dissonance and disorientation when applied to the field of Chinese taxation.37 almost all substantive tax rules in China are found in informal documents (‘circulars’)38 issued by the moF and/or the sat the classification of these circulars for bureaucratic purposes is at once intricate and obscure.39 For legal purposes, however, the bottom line is that they are not ministerial regulations, even when they purport to be of general application of course, generally applicable rules that do not have the force of law are found in other systems of tax administration as well.40 But their prevalence in the Chinese tax system represents an extreme case this is because fundamental rules of tax law that are made pursuant to clear delegations of authority are regularly set forth in such informal circulars, as are most substantive tax rules that are arguably legislative in nature regulations play a very marginal role moreover, government agencies, including the moF and the sat, have frequently exercised their rulemaking discretion in such a way as to limit, or simply violate, taxpayers’ rights established under formal rules

A Prescribing Fundamental Elements of Tax Law

Informally

There is a fundamental institutional arrangement in Chinese tax policy making (which is itself not reflected in any formal legal rule) according to which matters

of fundamental tax policy, left open by the nPC and the state Council, are to be

37 This is not to say that the problems of lawlessness identified in this section are less severe

in other Chinese regulatory spheres if anything, tax agencies may have adhered more strictly to rulemaking protocols than many other agencies

38 as a result of general confusion about the legal and bureaucratic status of various types

of informal documents, taxpayers and practitioners often refer to such documents in

Chinese as ‘document no ’ (haowen) in specific contexts, the english counterpart

to which is ‘Circular no ’ in more technical usage discussed in Pt V below, these are referred to as ‘normative document’

39 see, for example, Guoshuifa [2004] no 132, implementation measures for the Processing

of official documents of all tax agencies of China (‘official tax documents rules’) (sat, issued 9 october 2004)

40 For a summary of the use of such rules in the United states, see Kristin e hickman, ‘irB

Guidance: The no man’s Land of tax Code interpretation’ (2009) Mich St L Rev 239.

41 The arrangement dates back to the mid-1990s The most recent statements regarding it

can be found in two state Council internal management documents see Guobanfa [2008]

no 65, Provisions on the main Functions, internal Bodies and staffing of the ministry

of Finance (state Council General office, issued 10 July 2009), s 5(2); Guobanfa [2008]

no 87, Provisions on the main Functions, internal Bodies and staffing of the state administration of taxation (state Council General office, 10 July 2009), ss 2(1) and 5(1).

42 enterprise income tax Law (nPC, adopted 16 march 2007, effective 1 January 2008).

43 Ibid, art 20

44 state Council decree no 512 (effective 1 January 2008).

45 the LL itself is silent on how the nPC and state Council should delegate authority within the scope of statutes.

46 most of China’s taxes are still governed by state Council regulations and not by statutes The two exceptions are the eit and personal income tax.

governed by rules jointly issued by the moF and the sat.41 This arrangement is implicitly acknowledged by many specific statutes and regulations For example, the enterprise income tax Law (‘eit Law’)42 directly delegates the authority to determine the ‘specific scope and criteria of income and deductions’ to the moF and the sat.43 the enterprise income tax Law implementation regulations (eitLir),44 a state Council regulation, delegates the authority to make more specific rules to the moF and the sat no less than 29 times in almost all of these instances, the power delegated is clearly legislative in nature; the moF and the sat are expected not merely to interpret law but to prescribe rules that are missing none of these instances of delegation for purposes of the eit specifies whether the two agencies are to exercise their delegated authority through regulations or other means.45 in practice, the two agencies have exercised such authority solely through the issuance of informal rules indeed, the only joint regulations ever issued by the moF and the sat appear to be for taxes for which no statutes (and only state Council regulations) have been adopted.46

and in these cases, there is often only one joint moF/sat regulation for each tax any remaining jointly issued rules have taken non-regulation form

The moF and the sat thus appear to take the stance that for fundamental tax policy matters, there is no need to advance rules in forms recognised by the

LL in doing so, the two agencies have not simply disregarded legal niceties informal rules without legal effect lack the core features of formal legal rules: non-retroactivity, being subject to public input, robust bureaucratic approval procedure and possibilities of non-judicial challenge This means that informal rules can be seriously adverse to taxpayers Three examples from the last two years in the eit area illustrate the point